On July 5, 2019, Nirmala Sitharaman will be creating history by earning the distinction of being the first female Finance Minister of India to present a full budget. All eyes and ears will be on her, as she attempts to drive India towards making the world’s third-largest economy by 2030. People all over India have high expectations from her and the Modi 2.0 government. Let us look at the issues that people eagerly want her to address!
The intricacies of Budgeting
The newly-appointed finance minister has a daunting task at hand, as she aims to please everyone. It is a challenge because the revenue is dwindling, and the fiscal deficit is widening at the same time. Budgeting is a challenge because you have to dig one hole to fill up the other. It has to be done smoothly enough not to hurt any sector badly.
As on date, non-banking finance companies (NBFCs) are not in a healthy position with one scandal after another rocking Infrastructure Leasing & Financial Services (IL&FS). Dewan Housing Finance Corporation (DHFL) is also not in a great shape because of continuous defaults. The same is the story with public sector undertaking (PSU) banks as many of them are posting losses for three consecutive years and non-performing assets (NPAs) are increasing. Further, the automobile, fast-moving consumer goods (FMCG), and real estate sectors are in some trouble or the other. The government has to consider all these factors while preparing the budget.
The only way the finance minister can do that is to increase the revenue. And, this entails taxing the public in one way or the other. As you increase the taxes, there is a reduction in the disposable income in the hands of the people, thereby leading to a decrease in the purchasing power. It affects the economy as a whole. Therefore, the finance minister has to walk a tightrope to balance out things for the benefit of all.
The expectations from the Budget
The Modi 2.0 government has got a massive mandate from the Indian population. Clearly, every Indian has high hopes from this government. Sitharaman cannot afford to take a hard line and disappoint the honest taxpayers of this country. Here is what the different sectors of the economy expect from the finance minister as she gets ready to present her maiden budget in the Parliament.
Income Tax structure
Salaried persons and other individuals follow the budget closely to expect concessions in income tax. The interim budget presented in February 2019 extended benefits in the form of tax rebates to the people earning less than Rs 5 lakh. Previously, individuals in the income bracket of Rs 2.5 lakh to Rs 5 lakh had to pay tax @ 5%. The interim budget proposed doing away with this structure by suggesting a rebate. However, it did not envisage changing the tax rates for the people earning more than Rs 5 lakh. As a result, individuals earning over Rs 5 lakh are at a disadvantage.
The expectation from this budget is the extension of the benefit to include all income tax assessees. It might result in raising the tax exemption slab from Rs 2.5 lakh to Rs 5 lakh. Under such circumstances, the people earning less than Rs 5 lakh need not file their tax returns at all. The FM is in a peculiar position because raising the exemption limit can narrow down the tax base. It is contrary to what the government aims for. All these years, the endeavour has been to widen the tax base and improve tax compliance. Let us see what the budget has in store for us.
People expect the finance minister to increase the limit for the highest income tax rate of 30% to Rs 20 lakh from the current Rs 10 lakh. However, the chances are bleak.
There has been no revision in the corporate tax rate structure for an extended period. Hence, the expectations are high that the finance minister will offer a cut from the present figure of 30% to a manageable 25% irrespective of the turnover of the company. Alternatively, there is an expectation of abolition or lowering of the minimum alternate tax from 18.5% to 10%. Corporate entities also expect the simplification of the tax structure. Notably, the US has reduced the corporate tax rate from 30% to 21%. Also, it is around 20% in the BRICS countries. One can, thus, expect India to follow suit.
Goods and Services Tax (GST) can also expect a minor overhaul with the simplification of the compliance process and the introduction of a three-tier rate structure.
Stock Market Expectations
The stock market expects the government to either reduce or abolish long-term capital gains (LTCG) tax on listed securities. The government introduced the 10% LTCG tax on annual gains over Rs 1 lakh on listed securities in 2018.
The corporate entities expect a reduction in the dividend distribution tax (DDT) from the present 20% to 10%. There is a heavy expectation that Sitharaman will do away with the securities transaction tax (STT) introduced by the UPA government in 2004 to stop evasion of capital gains tax.
Real Estate Sector
The real estate sector has a long-standing wish to be considered as a full-fledged industry. Such a situation could enable developers to raise funds at low-interest rates, reduce the cost of capital, and enhance execution capabilities. There is an expectation of having a separate deduction for the repayment of housing loan installments instead of combining it with Section 80C as it is done today.
The real estate sector expects a separate deduction limit of Rs 1.5 lakh for principal repayment, apart from the deduction available up to Rs 2 lakh for interest repayment under Section 24.
NBFCs and Banks
The banking sector inherited a massive NPA problem with the change of guard from UPA to NDA in 2014. Today, the disease has spread to NBFCs as well. One must give credit to the previous government (Modi 1.0) for introducing the Insolvency and Bankruptcy Act. However, the progress of convictions under this act has been slow because of issues concerning the National Company Law Tribunal (NCLT) process. The banks and NBFCs can expect action from the government in this regard.
NBFCs are facing an acute liquidity crunch with no bank coming forward to lend to them. The IL&FS fiasco along with the defaults by DHFL has thrown the cat amongst the pigeons in the NBFC sector. It is indirectly affecting individual borrowers as well as the small and medium enterprise (SME) sector. Providing liquidity to NBFCs can result in the formation of a few asset reconstruction companies (ARCs) that can buy stressed assets from banks and improve their financial position.
On the recovery front, NBFCs expect the government to grant them the right to recover dues under the provisions of SARFAESI Act. The industry also expects the government to exempt NBFCs from the ruling that prohibits cash transactions above Rs 2 lakh.
An announcement of the merger of PSU banks is also on the cards after the recent successful experiment of the merger of Dena Bank and Vijaya Bank with Bank of Baroda. There can be another round of consolidation of banks in the coming financial year.
Recapitalisation of banks is in high demand today with almost all banks having issues with the capital adequacy ratio. The banking industry expects positive announcements in this regard from FM Nirmala Sitharaman. Also, the clamour is growing for reducing the government stake in PSU banks from 58% to 51%. It allows banks to tap the market for additional capital.
The government had announced Rs 75,000 crore assured income scheme for small and marginal farmers. This budgetary allocation includes a fertilizer subsidy. The government also announced that every small and marginal farmer would receive an assured income of Rs 6000 per annum directly into his/her bank account. The agricultural sector expects the government to continue with the scheme and improvise it as well. It can play a significant role in resolving the agrarian crisis.
One can expect some significant announcements regarding land reforms. There is a pressing need for allowing private sector investment in agriculture. It is to be noted that the agricultural sector needs improvements that would enable land aggregation to allow such investments.
There can be an announcement or two regarding minimum support price (MSP) for the agricultural sector. Boosting farm income is essential to achieve the government’s goal of doubling farmer income by 2022.
In order to grow as the third-largest economy, India is required to be self-sufficient and reduce their dependence on imports. The manufacturing industry needs a boost to be able to cater to the growing demands of the Make in India campaign. At the same time, India needs to improve its exports position. Hence, the industry expects the finance minister to announce export incentives to boost India’s export sector.
With the introduction of the marginal cost of lending rate method to determine the interest rates on loans, banks are not in a position to offer reasonable interest rates on deposits. It has a detrimental effect on the loan portfolio of the bank as well because the banks do not have enough funds at their disposal to lend. Hence, there is a demand from the financial sector to hike the rate of interest offered by banks on fixed deposits. The individual depositors will also get benefited in the bargain.
As the life expectancy of the average Indian has increased, health care for the elderly has become a critical feature. Citizens are demanding that the government provide tax exemptions on health care for the elderly. As on date, there is a tax exemption on preventive health check-ups up to Rs 5000. The industry expects an enhancement in this limit from Rs 5000 to Rs 20,000.
There is a tremendous disparity in the fee structure between private and public schools. It is a challenge for any parent to admit their child to a private school because of the high fees charged by them. Parents expect the finance minister to announce strict regulations for private schools not to charge arbitrary fees.
There is tremendous unemployment in India. Hence, there is a huge expectation that the finance minister will announce the creation of national employment policy. There is an urgent need for incentivizing sectors that show potential for creating jobs.
A country needs a robust infrastructure policy to progress. India has done well in this regard over the past five years with the construction of highways, Metro railways, flyovers, airports, and others. The job of the Modi 2.0 government is to carry the reforms further. Considering this, the FM could announce the creation of Rs 500 billion infrastructure credit guarantee and low-interest long tenure loan product for developing the country’s infrastructure and bringing it at par with the developed countries in the world.
One must say that the job of announcing the budget is a thankless one. You cannot please everyone. Announcing a budget involves cutting of corners that can cause dissent among specific sections of the population. However, FM Nirmala Sitharaman has to show deftness. Everyone, including the opposition parties, will dissect her Budget threadbare. She has the advantage of numbers on her side because of the overwhelming majority in Lok Sabha. It can provide her with some relief. Secondly, the prime minister has vested trust in her when appointing her as the finance minister. The industry also expects her to do a great job of presenting her maiden budget. We are in for exciting times on July 5, 2019, when she enters Lok Sabha with the traditional brown briefcase.